Wednesday, September 28, 2005

I refer to the letter entitled "Annuity conumdrum if I die early" by Lim Boon Hee (Today, 27 September).

Under the CPF Minimum Sum Scheme, a retiree is allowed to invest the minimum sum of $90,000 in a life annuity plan at age 55 and to receive the annuity payment from age 62.

Mr Lim asked what happens if the annuitant dies before age 62 (without receiving any payment) or at age 65 (after receiving only a part of the $90,000). Will the annuitant lose part or all of the $90,000?

Under the annuity plan now offered by NTUC Income, we will refund back the balance of the $90,000 with interest up to age 62, after deducting any payment that has been received by the annuitant. If death occurs before age 62, we will refund back $90,000 with interest. If death occurs after age 62 and the annuitant has received $20,000 (say), we will refund back $70,000 with interest earned up to age 62.

The annuitant will only lose the interest after age 62. This interest is left in the annuity fund to benefit the annuitants who live longer. The life annuity will continue to be payable for the lifetime of the annuitant, even if the annuitant lives beyond age 90 or 95 years.

If the retiree leaves the money in the CPF to earn interest at 4% per annum and takes out the monthly sum allowed by CPF, the minimum sum will be fully used up by age 82. After age 82, the retiree will have no further source of income.

With longer life expectancy, many people are expected to live beyond age 82. We can see many people around, who have lived beyond that age.

About 28,000 people have invested in a life annuity from NTUC Income. They realise the benefit of this type of insurance product. They do not wish to take the risk of living too long, and running out of money. We provide about 65% of all life annuity in Singapore.

If the retiree wish to leave behind some money for their family, they probably have a property and perhaps other savings or assets.

Sunday, September 25, 2005

NTUC has suggested that workers earning less than $1,000 be exempted from CPF. This will save them 20% of their wages. They need the full wages to meet a basic lifestyle, due to the high cost of living in Singapore.

NTUC suggested that the government should top up the CPF savings of these low income workers, so that they can buy their HDB flat.

I think that this is a wonderful idea.

In some countries, the government pays people who do not work. It is called unemployment benefit.

The approach by NTUC is to encourage these unemployed workers to work, even if it is a low income job. The government can help them by contributing to their CPF savings. It is an indirect way to give some help to these workers, but they must work.

I refer to the letter from Mdm Dorothy Ballard entitled "Policies similar but returns differ" (Straits Times, 11 Aug 2005).

Mdm Ballard said that the endowment policy that she bought from NTUC Income 20 years ago gave a return on maturity of 5.47 percent compounded annually. A similar policy taken from another insurer gave a lower return of 4.29 per cent.

This difference in return, compounded over 20 years, produces a 14% higher payout from NTUC Income.

I wish to explain why it is possible for NTUC Income to give a better return to our policyholders:

- we are a cooperative society- we pay lower commission to our insurance agent- we keep our salaries and expenses at a modest level- our shareholders receive a modest rate of dividend.

By spending less, we are able to give a better return to our policyholders through lower premium or higher bonus. This can amount to a lot of money over many years.

Many people think that the key factor is skill in investment management. This is not so. Over a period of years, most large sized funds will produce an average rate of return that reflect the economic fundamentals.

We hope to convince Mdm Bollard and other policyholders that it does matter who they choose to invest their long term savings with, and that they will choose a well managed cooperative.

Add a term rider (LTA or DTA) to an Ideal plan. It should be 20 years of savings. For example, if the policyholder wish to save $250 a month, the term rider can be for $60,000.

Under LTA (level term assurance), the term rider pays $60,000 on death during 20 years, plus the saving in the Ideal plan. After 20 years, the rider expires, and the accumulated savings (which is $60,000 plus gains) will be paid.

Under DTA (decreasing term assurance), the term rider pays $60,000 reducing by $3000 each year over 20 years, plus the savings in the Ideal plan. Although the term rider reduces yearly it is more than offset by the additional savings in the year.

On death at any time, the total payout (including the savings in the Ideal plan) should be more than $60,000.

The annual premium is:

Entry -- Male -- -- Female -Age LTA DTA LTA DTA

25 84 42 55 25 35 211 85 139 57 45 686 290 455 190

The premium rate for DTA is less than half of LTA. The cost difference is more significant at the higher entry ages.

The premium rate for female is about one-third lower than males.

The annual cost of LTA and DTA at the younger entry ages (ie less than 35) is less than $200, and is highly affordable.

RECOMMENDATION: Add a LTA or DTA to our Ideal plan. The premium is level and does not increase with age.